What Makes a Good Dividend Growth Rate? A Practical Guide for Income Investors

Understanding the Real Impact of Dividend Growth

If steady income from your portfolio matters to you, dividend growth rates deserve your full attention. Here’s why: this metric reveals whether a company can actually afford to keep rewarding shareholders with bigger payouts over time. Rather than just looking at current yields, dividend growth rate tells you the trajectory—is management confident enough to increase returns year after year? That’s a powerful signal of financial strength.

What Exactly is a Dividend Growth Rate?

Strip away the jargon and dividend growth rate simply measures how fast a company’s per-share dividend payment increases over consecutive periods, expressed as a percentage. Compare this year’s dividend per share to last year’s, and you’ve got your growth rate. It’s that straightforward.

The Signs of a Healthy Dividend Growth Rate

When a company consistently boosts its dividend, you’re witnessing proof of solid operational cash flow. Take Johnson & Johnson (NYSE: JNJ) as the textbook example—six decades of uninterrupted annual dividend increases since 1963. That consistency isn’t accidental; it reflects management’s confidence that business fundamentals remain robust. Companies maintaining this pattern typically enjoy more stable stock valuations and attract quality investors seeking reliable income streams.

But what counts as “good”? Industry averages typically range from 8% to 10% annually. Anything hitting double digits puts a stock in the above-average category. Yet context matters—some mature sectors naturally deliver modest growth while emerging industries might post higher rates.

The Warning Signs: When Dividend Growth Slows

Conversely, stagnant or declining dividend payments can signal operational struggles. If a company lacks sufficient cash generation to increase shareholder returns, its underlying business may be facing headwinds. Investors often read this as a red flag and move capital elsewhere, which can depress the stock price over time.

How to Actually Calculate Dividend Growth Rate

The simple method works best for single-period comparisons. Take the current dividend per share and divide by the prior period’s dividend per share. If it jumped from $0.50 to $1.00, that’s a 100% growth rate—basically a doubling.

For longer timeframes, compound annual growth rate (CAGR) gives you a more realistic picture. Suppose dividends grew from $0.50 to $1.00 over three years. Divide $1.00 by $0.50, then raise the result to the power of one-third. You get approximately 8.2% annualized growth—a far more meaningful number than the raw 100% increase.

Building Your Selection Criteria Beyond Dividend Growth

Dividend growth rate shouldn’t stand alone in your analysis. Examine the payout ratio—how much of earnings actually goes to shareholders. Companies paying out 60-80% of profits can sustain increases; those exceeding 90% risk cutting future dividends during downturns.

Cross-reference with other fundamentals: earnings per share (EPS) should be expanding to justify dividend hikes. The price-to-earnings ratio (P/E) reveals whether the stock trades at reasonable valuations. Return on equity (ROE) shows management’s capital efficiency. Finally, review sector trends—a company outperforming industry peers on dividend growth deserves closer inspection.

Why This Matters for Your Portfolio

A solid dividend growth rate demonstrates management commitment and business resilience. Companies able to increase shareholder payouts year after year typically enjoy stronger underlying economics and better long-term prospects. Whether seeking immediate income or eventual capital appreciation from rising dividends, this metric deserves a prominent place in your investment checklist. Start by identifying stocks with above-average dividend growth rates, then validate your choices using the broader financial framework outlined above.